Droughty crops hard to market

In my 44 years of farming in non-irrigated Nebraska, I have experienced a lot of dry weather markets. Dealing with drought is never easy. Results of dry weather depend heavily on where the farm is located. For a farmer in Pawnee County, Nebraska, drought means zero corn yield. For the individual who owns a farm in Champaign County, Illinois, drought might mean 150 bushels per acre instead of 200. For a farmer in central Illinois, drought means two weeks of hot weather with no rain. For me, two weeks of hot weather with no rain is an annual event except in very unusual years.

Timing of the dry weather event is critical. Yields will be hurt badly, if the heat and dry weather comes before the corn has reached its full growth. If the dry event comes after pollination, the results are not nearly as bad. If rain comes in late July or early August, soybean yields will not be affected nearly as much as corn yields.

Making sales in a weather rally is an exercise in frustration. In the drought of 1980, the peak in prices was around Thanksgiving. In 1983, the peak in prices was in late summer. In 1988, the top was around July 1. Setting any specific date as a target to trigger sales is mostly a guess.

The one principle I have developed in many years of watching grain prices is that the closer the problem is to Chicago, the sooner the market reacts to the weather event. That scenario is playing out this year. With the center of the problem in Illinois and Indiana, the market began reacting to the potential for reduced yields sooner rather than later. When the top will come is anyone’s guess.

Looking back at historical charts, it is difficult to find a pattern other than location of the affected area. Sometimes, two dry years in a row, such as 2002 and 2003 will result in two peaks. The question is whether a dry year following a year of flooding such as 2011 also causes two peaks.

I suggest that the farmer be conservative in making sales, until after harvest. At least that minimizes the odds of selling more grain than what is produced. Crop insurance with harvest price coverage is a good tool. Options can be used but the expensive premium dictates using them judiciously. Even years of experience in dealing with the unknowns of weather do not make marketing easy when the needed rain does not fall!

weather marketsDANIEL HILLER 06/29/2012 @ 1:37pm
with the advent of the outside spec money from different sources, the old rules for weather markets may not hold any more. that being said I look at the number of market days of weather markets to give me timing to start buying puts and selling out of the money calls as well as taking profits. Yes selling a crop is taking a profits when the prices are above cost of production. I am a new farmer in dry nw Ohio and also a retired commodity broker. there is a lot less risk farming and it is more fun.